Congress is moving ahead with legislation to amend a tax law
that allows U.S. exporters to establish foreign sales corporations
(FSCs) abroad. With FSCs, companies can lower their income tax rate
on the profits made from selling products in other countries. (For
more details, see February 2000's "Tax
Talk.")

The legislative push is in response to a recent ruling from the
World Trade Organization (WTO) indicating that the 1982 law
allowing FSCs provides unfair subsidies to U.S. companies. The
European Union brought the complaint to the WTO.

Because of the FSC tax law, U.S. exporters receive an estimated
$4 billion in tax breaks per year. The U.S. government contends
these breaks help maintain U.S. companies' price
competitiveness in world markets.

In February, the WTO upheld a preliminary ruling against the
United States and recommended that it bring the law into conformity
with the WTO rules. Countries can ignore rulings, but then they
must compensate their trading partners or accept sanctions.

Congress is considering legislation designed to preserve the
financial benefits that companies receive when setting up FSCs and
at the same time address the EU complaint. The legislation would
amend the law so it applies to exports or to goods made by
companies' affiliates in foreign countries.

The EU isn't satisfied with Congress' effort. It says
the legislation not only preserves the tax break available to U.S.
companies but also extends to it other types of businesses.

The United States' solution is unusual, sources say.
Normally, case-losing countries compromise. In this case, however,
Congress feels the FSC law provides a benefit to U.S. companies
that needs to be preserved.

If you operate an FSC, don't panic, says Saul B. Brenner, a
tax partner in charge of international taxation for the New York
City accounting firm David Berdon & Co. LLP. While there may be
some modification in the FSC law, he says, U.S. companies are not
likely to lose the tax break altogether.

Joan Szabo is a writer in Great Falls, Virginia, who has
reported on tax issues for more than 13 years.